ECB joins central bank chorus hinting at faster tightening

The European Central Bank has indicated it is preparing to cut its crisis-era stimulus programme faster than anticipated, joining monetary policymakers in most developed economies in expressing increased confidence in the global economic recovery.

The ECB’s language was characteristically subtle; instead of discussing the eurozone’s continued “recovery”, it referred to the bloc’s “expansion”. But the change of wording was enough to send the euro rallying nearly 1 per cent against the dollar and German bond yields rose to near two-year highs.

Mario Draghi, the ECB chief, set the bank’s current slow path of tapering its stimulus programme in October, when he announced he would cut bond buying in half to €30bn each month until September. Mr Draghi also vowed to hold borrowing costs at their current record lows until well after the ECB ends its bond buying. The bank has bought a total of €2.3tn of bonds since starting QE in early 2015.

But the minutes of the December 14 meeting showed Mr Draghi’s governing council was already reconsidering how the eurozone’s “continued robust and increasingly self-sustaining economic expansion” should weigh on its decision-making, saying the ECB should better communicate its confidence in the region’s growth.

“Looking ahead, the view was widely shared among members that the governing council’s communication would need to evolve gradually,” the account said. “The language pertaining to various dimensions of the monetary policy stance and forward guidance could be revisited early in the coming year.”

At the December meeting, the ECB’s staff upgraded its forecasts for growth to 2.4 per cent in 2017 and 2.3 per cent in 2018 — the most significant in the history of the bank’s quarterly projections. Households and businesses in the region are expected to keep spending, which investment activity is also forecast to pick up.

Most ECB watchers still think QE will continue until September, but expectations of purchases continuing beyond that are diminishing.

Like the ECB, the Bank of England and the US Federal Reserve have said they expect to tighten their ultra-loose money policies in 2018 in the face of strengthening economic indicators, with the Fed saying it is likely to raise rates three times.

However, some Fed officials have hardened their calls for higher rates in the light of the recently-passed Republican tax cut. Robert Kaplan, head of the Dallas Fed, said this week policymakers needed to be wary of the “risk of overheating” following passage of the Donald Trump-backed overhaul.

Both the US and the eurozone economies have entered 2018 growing at pre-crisis levels. The ECB’s 25-member governing council “expressed confidence that the euro area economic recovery had now moved into expansionary territory”.

The minutes said the much discussed “output gap” — between where growth now is and where it would be were the economy operating at its full capacity — would close “in the near future, earlier than previously projected”.

While the ECB staff projections showed inflation, at 1.7 per cent, remaining under the ECB’s target of just below 2 per cent in 2020, policymakers were confident that price pressures would return.

The expansion meant “it was seen as very likely that capacity constraints would become increasingly binding and lead to higher price pressures. It was also remarked that the positive feedback loop between economic growth and price increases could, once more firmly established, operate more rapidly than expected.”